Paschal’s prudence

Minister for Finance and Public Expenditure and Reform Paschal Donohoe has adopted a doctrine far removed from the “when I have it, I spend it” canon of erstwhile Finance Minister Charlie McCreevy. Ahead of Budget 2019, he is proselytising ‘prudence’. eolas reports.

Appearing to heed IMF, ECB, OECD, European Commission and ESRI counsel, this autumn, the Finance Minister is targeting a budget deficit of only 0.1 per cent of GDP. The Stability Programme objective is a minimum target and Donohoe has pledged: “We will not adopt taxation and spending measures that result in a larger deficit than this.” This allows for a budgetary package of €3.4 billion. Of this, €2.6 billion is pre-committed to expenditure increases, leaving a total of €800 million for further allocation, with a committed ratio of 2:1 on expenditure increases and tax cuts (as per the confidence and supply arrangement).

As outlined in the Stability Programme Update, the pre-committed expenditure provides for:

• a €1.5 billion increase in capital expenditure under the National Development Plan;

• €0.4 billion to maintain existing levels of service (relative to demographics).

Transparency

Over several years, the Government has sought to increase “transparency and accountability in the Budget process” and foster “meaningful dialogue”. Hosted by the Department of Finance and Public Expenditure and Reform, the National Economic Dialogue has, along with the Summer Economic Statement (SES) and Mid-Year Expenditure Report (MYER), become a constituent component of the reformed budgetary process. Its objective is to “facilitate open discussions on the competing economic and social priorities” faced by government.

SES 2018 outlines the Government’s budgetary strategy, defined by incremental increases in public expenditure facilitated by stable and predictable tax revenue. The MYER establishes the initial pre-Budget position, in line with the parameters set by the SES. Meanwhile, the Spending Review focuses on efficiencies to ensure value for money from current expenditure.

Together these components represent a process through which each government programme is intended to deliver best value for money. In his MYER foreword, Donohoe writes: “With €56 billion allocated to the delivery of day-to-day public services for 2018, it is crucial that there is as much focus on the value for money of the existing level of expenditure as on any additional amount to be made available on Budget Day. The rolling nature of the current Spending Review will provide this focus.”

Summer Economic Statement

Speaking at the launch of the latest SES, Minister Donohoe outlined the Government’s medium-term economic and fiscal strategy. As per the SES, the Government’s strategy revolves around five principles:

1. ensuring steady, sustainable improvements in living standards;

2. rebuilding fiscal capacity;

3. prioritisation and realism;

4. avoidance of procyclical policies; and

5. a focus on fiscal sustainability.

The Department anticipates 5.6 per cent GDP growth in 2018 and 4.0 per cent growth in 2019. As a result of the “political choices” made in Project Ireland 2040, the Government is pursuing a 25 per cent increase (€1.5 billion) in capital spending (up to >€7 billion) “in order to address the serious infrastructural deficits that emerged during the recession”.

“It is vital that government policy does not add fuel to the fire but that we make sensible and prudent decisions… While the economic situation is relatively healthy at present, it is clear that the external environment is also becoming increasingly challenging.”

Overheating

As Ireland approaches a reasonable definition of ‘full employment’ (a record 2,237,900 people), Minister Donohoe is conscious of the need to avoid ‘overheating’ the economy. This occurs when capacity constraints in some sectors cannot meet levels of aggregate demand (demand for GDP). Attempts to capitalise on excess demand through price increases can inadvertently provoke a reduction in aggregate demand and consumption. If central banks then tighten monetary policy, this, alongside reduced consumption, can trigger recession.

As such, the Minister indicated: “It is vital that government policy does not add fuel to the fire but that we make sensible and prudent decisions… While the economic situation is relatively healthy at present, it is clear that the external environment is also becoming increasingly challenging.”

For instance, the European Central Bank (ECB) has indicated that its quantitative easing programme will cease in late 2018, which could stimulate an increase in interest rates. Additional headwinds include Brexit, Ireland’s relatively high public debt, an overreliance on multinationals and plans to harmonise corporation tax across the eurozone.

As such, the Government intends to bolster its capacity to respond to economic headwinds and is prioritising the broad avoidance of procyclical fiscal policy through a reduction in public debt, a reduction in the deficit and the establishment of a Rainy Day Fund (utilising some of the historically high levels of corporation tax).

National Economic Dialogue

Addressing the fourth National Economic Dialogue at Dublin Castle, An Taoiseach Leo Varadkar stressed that, while the economy was “powering ahead”, the external environment was becoming more challenging. “International developments in areas such as trade and tax have the potential to impact adversely on our economic wellbeing,” he said.

That being said, Varadkar was keen to draw attention to consumer spending, tax receipts and labour market developments as indicators of Ireland’s strong economic fundamentals. Similarly, he pointed to the latest Survey on Income and Living Conditions as evidence that “for the first time in years, we are on the right track again when it comes to poverty, deprivation and inequality”.

Expenditure

In light of rising expectations associated with strong economic performance, Minister Donohoe qualifies this by emphasising: “Expenditure continues to exceed revenue and we are still borrowing to meet the shortfall.” As such, the Government aims to underpin increases in public expenditure with “stable and predictable” tax revenue in order to produce “incremental and sustainable” improvements in services.

Donohoe asserts that the full fiscal space will not be utilised for several reasons. Firstly, it involves the application of procyclical principles and there is not sufficient available tax revenue. Secondly, there must be a focus on reducing nominal debt in the face of a debt to GNI ratio of 100 per cent. Thirdly, there is a need to insulate against economic shock as global economic risks grow. The Taoiseach reiterated: “We cannot build permanent expenditure commitments on revenues that may not be sustainable,” adding, “we must maintain a broad tax base.”

Overall, the Government’s economic policy is based upon six principles. These are:

1. prudent management of public finances;

2. investing in infrastructure;

3. public service reform;

4. “taking our place among the nations of the world”;

5. raising living standards; and

6. achieving full employment with “better jobs”.

Going forward, the Government aims to reduce national debt and move towards a minor surplus in Budget 2020.

Efficiency

Published as a series of selective papers, the Spending Review identifies sectors in which Exchequer funds can be allocated through improved governance structures to enhance accountability and efficiency. This year’s review marks the beginning of a second three-year cycle, consistent with Minister Donohoe’s announcement on Budget Day 2016 which indicated that a review of government spending would take place every three years.

Each year, the Government spends in excess of €60 billion. The objective of the Spending Review is to ensure that “each government programme is delivering on its objectives and ensuring the best possible outcomes for money spent” as per Our Public Service 2020.

“There needs to be as much focus on the existing level of expenditure, which amounts to almost €62 billion for 2018, as there is on the year-on-year incremental increases on spending,” Donohoe stated, before adding: “The detailed analysis produced during the Spending Review process provides greater transparency on the extent to which spending is delivering improvements in public services for our citizens. This greatly enhances the evidence base for Government when considering budgetary options.”

Meanwhile, Varadkar has identified healthcare as “the biggest public service challenge” demanding “the greatest level of reform” out of all the areas of government expenditure. In 2018, the State will spend over €15 billion on public health services. “Given our relatively youthful population, [it] is hard to justify,” he suggests.

Politics

Running any sort of deficit in 2019 is perhaps symptomatic of the fact that the Government is still a hostage to realpolitik. To an extent, Donohoe is hamstrung in that, firstly, his budget is underpinned by the confidence and supply arrangement with Fianna Fáil and, secondly, there is a possibility of a general election within the next year. An inescapable axiom in politics is that while ‘giveaways’ through increased expenditure and tax cuts positively correlate to electoral success, this is less true of advocation for deficit reduction or a budgetary surplus.

Indeed, Sinn Féin has been vocally opposed to the Rainy Day Fund proposal, claiming that it would ‘normalise’ current crises. Speaking with eolas Magazine, the party’s Eoin Ó Broin TD suggested that the Finance Minister’s strategy is “not prudence or stability, [it’s] actually failing to invest in social and economic recovery on the basis of equality, to the benefit of the 20 or 30 per cent of people at the top”.

Simultaneously, while supporting the establishment of the Rainy Day Fund, Micheál Martin’s Fianna Fáil, upon which the Government is dependent in order to pass Budget 2019, is insisting that it contains significant emphasis on housing and health, including a €100 million affordable housing scheme.

Responding to the Government’s pre-budget indications, Fianna Fáil finance spokesman Michael McGrath also scathingly suggested: “the Government have failed to meet the Medium Term Objective (MTO) of a balanced budget in structural terms which was announced as a priority by the Minister in Budget 2018 and we support the policy position that this must be achieved next year. The failure to meet the MTO in 2018 has impacted negatively on the available resources in 2019.”

The debate is set to continue when the Dáil returns from its summer recess.